Speech
Remarks to Commemorate the 150th Anniversary of Bendigo Bank

The Premier, the Hon. John Brumby; The Right Reverend Bishop Ron Stone; the Mayor
of the City of Greater Bendigo, David Jones; the Chief Executive Officer of
the City of Greater Bendigo, Craig Niemann; the Chairman of Bendigo and Adelaide
Bank, Robert Johanson; the Managing Director of Bendigo and Adelaide Bank,
Rob Hunt; Local Members of Parliament; distinguished guests; ladies and gentlemen.

It is a pleasure to be here in Bendigo this evening as you celebrate the sesquicentenary
of Bendigo Bank. Your city is resplendent for the occasion, and one cannot
help but get a sense of the history as one moves around here.

And what a history it has been – from sheep paddocks, to gold rush, to prosperous
modern city. You have much to show for the past century and a half.

Like so many of our fine institutions, the beginnings of Bendigo Bank were actually
rather humble. In the early days following the discovery of gold in 1851, the
population of this town grew rapidly. People came in search of wealth and,
as always in such a search, some had success and some didn't. The population –
one in fifty Australians lived here at one stage – was rather transient.
Certainly many of them were far from well housed: thousands lived in tents.

The prominent citizens who had decided to make Bendigo their home permanently wanted
to encourage a more stable, home-owning society. The building society
movement that had earlier taken root in Britain provided a model of how to
go about it. And so, on 9 July 1858, the Bendigo Land and Building
Society was established, with 150 or so individuals subscribing 5 pounds
each in capital.

This society, eventually re-constituted as a permanent building society became,
in combination with some other entities, the nucleus of the entity whose anniversary
we celebrate today. It grew with its community and by merger and acquisition
with other building societies and financial institutions, both locally and
further afield. In 1995, then Australia's oldest and Victoria's
largest building society, it took a banking licence and developed further into
the institution that we know today. Following the merger with Adelaide Bank,
the new entity has assets of around $50 billion, and is Australia's
11th largest
bank.[1]
Though small in market share, its branch presence is considerably larger.

If we were to compile a list of financial institutions of the second half of the
19th century, we would find that few of the names would be familiar
ones. Not many entities of that time are still in existence today. Our major
banks, of course, have a long history, in some cases dating back to the early
convict era. But a great many financial institutions of the 19th century,
particularly Victorian building societies, succumbed to one or other of the
busts that occurred in the 1890s, the 1930s and the 1990s.

The 1890s episode was a particularly severe depression in Victoria, with a collapse
in land values and widespread closures of financial institutions. Nearly half
the building societies closed. This, as always, followed a period of extreme
euphoria. Consider the way the historian Michael Cannon describes the
general scene in Melbourne in the 1880s:

The land mania of the 1880s took two main forms. The first was based on a plethora
of building societies, whose optimistic officials believed that every family
in the colony could simultaneously build their own house, keep up the payments
through good times and bad, and support an army of investors who were being
paid high rates of interest for the use of their money. The second form of
mania was the deeply-held belief that it was impossible to lose money
by ‘investing’ in land – a belief which persists to
the present
day.[2]

Those words, penned in 1966 about an event a century ago, carry a more-than-faint
echo of more recent times in other parts of the world. If we may paraphrase
Cannon, too many of the world's major financial intermediaries thought
that loans of dubious quality, originated by salespeople they knew little about,
to borrowers whose credit standing, to the extent it was known, was very poor,
could be sold in ever increasing quantities to investors looking for AAA security.
One day the music stopped, as it always does, and they were left standing.

The 1890s were tough for the city of Bendigo, as for most of Victoria. A number of
banks in the city closed their doors. But its main building society remained
sound. ‘The Bendigo’ had not ventured as far into Melbourne real
estate as others, nor was it as highly leveraged. There are some lessons there.

Moreover, the fact that ‘The Bendigo’ has endured so long being based
in a town ‘born of gold’, as Tim Hewat put it in his
history,[3]
is perhaps all the more remarkable. Mining towns have their ups and downs with
the inevitable cycles of discovery and depletion of ore bodies, booms and busts
in commodity prices and all the associated exuberance, risk taking and inevitable
subsequent disappointment for some, that goes with them. Bendigo in the gold
rush days was no different.

For a locally based financial institution to ride through such cycles, without itself
being too swept up in events, something must have been working well. It is
surely not chance – 150 years would be a rather long lucky streak. More
likely, this success is remarkable testimony to generations of managers who
had a good assessment of risk, plenty of common sense, a strong attachment
to their core business and an ability to resist the temptation of exotic new
opportunities.

It sounds simple. Yet the managements and Boards of some of the world's largest
and most sophisticated financial institutions did not meet that standard during
the past decade, and the fallout is now upon them (and the rest of the world).
Much shareholder wealth has been destroyed and reputations of some major institutions
damaged.

The result has been one of the most acute withdrawals in confidence between major
institutions in living memory. Inter-bank borrowing rates at term shot
up, as global banks, suddenly facing pressure on their own liquidity, became
more cautious about extending it to others. Because financial markets are globally
integrated, these pressures were quickly transmitted across national borders.
The strains on liquidity have extended, in more muted fashion, even to parts
of the world where local credit quality is much higher. Australia has suffered
less than the United States, Europe or the United Kingdom, but nonetheless
term funding spreads increased and remain today higher than they were before
the onset of the sub-prime crisis last August.

Recent developments exposed the risks inherent in a business model involving heavy
reliance on wholesale, short-term funding and securitisation of loans.
For some institutions, events unfolded in devastating fashion. We saw a run
on a significant British bank for the first time since the gold rush days in
Bendigo.

On the other hand, during this period, the virtues of a well-run, straightforward
business model, reliable retail funding, strong knowledge of the local market,
and a suite of attractive retail banking services came once again to the fore.
Soundly run institutions have seen a rise in their market positioning relative
to more risky ones.

Soundness, however, is only one part of the equation. Of course we need the financial
system to be a safe repository for the savings of the population. But to play
its full role in the economy, the financial sector needs also to mobilise those
savings, putting them in the hands of investors who are in a position to make
effective use of them. Banks are in the business of risk management, not complete
risk avoidance. Their job is to offer a secure savings vehicle on the liability
side of the balance sheet, but to take a measured degree of credit, maturity
and liquidity risk – very carefully managed! – to provide finance
for sound investment propositions. Those propositions range from housing, to
small business, to large-scale investment projects such as the ones that
are happening apace at present with the commodity price boom. With capital
markets struggling at present, this role is even more important than it normally
is. In addition, the transaction services that banks and other authorised deposit-taking
institutions offer their customers are key to facilitating the huge volume
of transactions which occur every day in the modern economy.

Historians point out that this function of the financial system broadly defined –
the efficient mobilisation of financial capital – is critical for
economic growth. As the industrialised economy took shape, markets for capital
grew alongside. Had it been otherwise, brilliant technological innovations
would have remained in the laboratory, entrepreneurship would have been stifled,
growth would have been slower and living standards lower. Debt and equity markets,
together with banks and other financial intermediaries, have been, and remain,
key parts of the financial infrastructure.

The history of Bendigo provides a good example of this general principle. In the
early years, prospectors sought alluvial gold, which was found in or around
streams and for which the requisite capital equipment was a pan and a shovel.
As time passed and prospectors increasingly turned their attention to quartz-gold
deposits, in some places deep underground, more physical capital was required.
Steam- and air-driven equipment made men working deep underground productive
enough that profit could be earned even when a great deal of rock had to be
lifted to the surface and processed to find an ounce of gold. The formation
of company structures, and the establishment of a local stock exchange in the
1860s, facilitated the provision of finance for all this activity.

Now, of course, this was not without risk. Moreover, one could hardly claim that
the exchange was not given to occasional bouts of ‘irrational exuberance’.
Geoffrey Blainey's account of October 1871, with trading continuing
on the streets into the early hours of the morning, with even the destitute
seen ‘pencilling [their] own share transactions’, gives the
flavour.[4]
Capital markets are prone to bouts of euphoria, which is why it is best if
banks and other deposit-takers keep a polite distance from the riskier
end of the spectrum, and avoid lending against the more speculative assets.
Nonetheless, for all their occasional dislocations, the development of equity
and debt markets has been important in the advance of the modern economy. Today,
the Bendigo Stock Exchange, like Bendigo Bank, continues, even if in slightly
less colourful fashion, providing an equity market for small and medium-sized
firms.

In the period ahead, at the global level, it will obviously be critical to restore
the proper functioning both of capital markets and of major international financial
institutions. Losses need to be recognised, capital structures repaired where
necessary, risk management processes re-thought and managerial incentives
more carefully structured. That process is under way, though it may have some
way to go yet. The main Australian institutions are generally well placed,
in my judgement, to prosper in this environment, if they continue to manage
their businesses well.

At the local and regional level, meanwhile, there is an ongoing role for the provision
of financial services. Bendigo Bank's community banking model, which
seems to be a very successful one to date, is an innovative response to the
demands of local communities for such services. The major banks tended to scale
back their regional presence, in response to the cost pressures on them after
the events of the early 1990s, and the changing economics of branch banking
which became apparent as financial liberalisation proceeded. This withdrawal
left an opportunity, but to take it, someone had to devise a business model
that could cover costs at a price which the community could accept. The Bendigo
model seems to meet this test.

In short, though I do not say this as a supervisor of banks, this model seems to
have worked pretty well. It shows that not only is there an important role
for regional banks in the modern world, but that well-run institutions
can successfully fill that role. As we are constantly reminded, even in a globalised
world, communities are still local in many important respects.

So in conclusion, to the shareholders and managers of Bendigo Bank, and the broader
community of Bendigo: ‘Happy Birthday’. I wish you many more. I
am sure John Laker, the Chairman of APRA who is here this evening, would
join me in exhorting you to continue your wise and prudent management so that
the City of Bendigo, its bank and its people will prosper for another 150 years.